A little bit of risk doesn’t equal reward for super savers

Super savers who pick a traditional growth fund are getting little extra return for the bigger risk they’re taking, research being done by an influential financial body reveals.

Instead, investors should think about throwing caution to the wind and ramping up their investment risk to a much higher level, early findings show.

The Australian Financial Services Centre (AFSC) is studying how retirees’ incomes are impacted by their choice of default super fund.

Rodney Maddock, a professor at Monash Business School who’s also the interim director of the AFSC, explained that retirees typically just a year or two’s worth of extra income by picking a riskier ‘growth’ super fund than they did from a more conservatively invested fund.

When choosing a default fund for their super, workers are usually asked to choose between from a range of funds that offer different levels of risk. The common theory is that younger workers should choose a fund that’s invested in riskier assets that provide a better return, then gradually move their savings to a less risky fund as they get closer to retirement.

But Maddock said that the growth funds – industry parlance for those offering a higher level of risk – being sold by the mainstream super fund providers had barely any advantage over lower-risk funds when it came to returns.

“The main finding is that there is little difference between the performance of growth and conservative products on offer,” he told the Conference of Major Superannuation Funds.  “Standard packages offered to retirees all produce similar expected returns.”

Figures from Super Ratings that the AFSC provided to Starts at 60 bear this out. In the 10 years to 2015, the median return on a growth fund – one that held 77-90 percent of its investment in growth assets – was 5.36 percent. The median return for a ‘capital stable’ fund – with 20-40 percent in growth assets – was 4.16 percent over the same period.

Meanwhile, super savers who went for very safe options could be robbing themselves of as many as 10 years’ worth of retirement income, the AFSC’s preliminary research showed, after it measured the theoretical return on a portfolio that was invested entirely in bonds versus one invested entirely in equities.

But on the flipside, Maddock said that research by Susan Thorp, a professor at the University of Sydney Business School, showed that dramatically ramping up a portfolio’s risk level was a sensible investment decision.

“This is because the pension provides insurance on the downside,” he explained. “With this in place, retirees should invest aggressively, knowing they keep the upside and the government provides support in case the portfolio does poorly.”

Thorp has argued that savers should hold about 90 percent of their investment in risky assets at age 65, then gradually reduce that allocation as they age. Thorp doesn’t specify in her research what constituted a risky asset, but emerging markets equities or high-yielding bonds are commonly chosen by retail investors looking to take bigger risks in return for the possibility of larger returns.

The ASFC’s full research into retirement incomes won’t be finalised until the middle of the year, with the findings Maddock referred to based largely on preliminary research.

What’s your risk appetite like when it comes to your super? Do you reckon risk equals reward?